What if you could read the principles for success for some of the world’s greatest traders? Well you can, here is how author Jack Schwager summed up the the similarities of the ‘Market Wizards’ he spent years interviewing in his second book.
The following is an summarized excerpt from Jack D Schwager’s book, The New Market Wizards. I highly recommend this book for all active traders.
- First Things First
You sure you really want to trade ? It is common for people who think they want to trade to discover that they really don’t. - Examine Your Motives
Why do you really want to trade ? Did you say excitement ? Then don’t waste your money in market, you might be better off riding a roller coaster or taking up hand gliding.
The market is a stern master. You need to do almost everything right to win. If parts of you are pulling in opposite directions, the game is lost before you start. - Match The Trading Method To Your Personality
It is critical to choose a method that is consistent with your your own personality and conflict level. - It Is Absolutely Necessary To Have An Edge
You cant win without an edge, even with the world’s greatest discipline and money management skills. If you don’t have an edge, all that money management and discipline will do for you is to guarantee that you will gradually bleed to death. Incidentally, if you don’t know what your edge is, you don’t have one. - Derive A Method
To have an edge, you must have a method. The type of method is not important, but having one is critical-and, of course, the method must have an edge. - Developing A Method Is Hard Work
Shortcuts rarely lead to trading success. Developing your own approach requires research, observation, and thought. Expect the process to take lots of time and hard work. Expect many dead ends and multiple failures before you find a successful trading approach that is right for you. Remember that you are playing against tens of thousands of professionals. Why should you be any better ? If it were that easy, there would be a lot more millionaire traders. - Skill Versus Hard Work
The general rule is that exceptional performance requires both natural talent and hard work to realize its potential. If the innate skill is lacking, hard work may provide proficiency, but not excellence.
Virtually anyone can become a net profitable trader, but only a few have the inborn talent to become supertraders ! For this reason, it may be possible to teach trading success, but only upto a point. Be realistic in your goals. - Good Trading Should Be Effortless
Hard work refers to the preparatory process – the research and observation necessary to become a good trader – not to the trading itself.
“In trading, just as in archery, whenever there is effort, force, straining, struggling, or trying, it’s wrong. You’re out of sync; you’re out of harmony with the market. The perfect trade is one that requires no effort.” - Money Management and Risk Control
Money management is even more important than the trading method.- Never risk more than 5% of your capital on any trade.
- Predetermine your exit point before you get in a trade.
- If you lose a certain predetermined amount of your starting capital (say 10 to 20%), take a breather, analyze what went wrong, and wait till you feel confident and have a high-probability idea before you begin trading again.
- The Trading Plan
Trying to win in the markets without a trading plan is like trying to build a house without blue prints – costly (and avoidable) mistakes are virtually inevitable. A trading plan simply requires a personal trading method with specific money management and trade entry rules. - Discipline
Discipline was probably most frequent word used by the exceptional trades that I interviewed.
There are two reasons why discipline is critical.- Its a prerequisite for maintaining effective risk control.
- You need discipline to apply your methods without second guessing and choosing which trade to take.
A final word, remember that you are never immune to bad trading habits – the best you can do is to keep them latent. As soon as you get lazy or sloppy, they will return !
- Understand That You Are Responsible
Whether you win or lose, YOU ARE RESPONSIBLE for your own results. I’ve never met a successful trader who blamed others for his losses. - The Need For Independence
You need to do your own thinking. It also means making your own trading decisions. Never listen to other opinions. - Confidence
An unwavering confidence in their ability to continue to win in the markets was a nearly universal characteristic among the traders I interviewed. - Losing is Part of the Game
The great traders realize that losing is an intrinsic element in the game of trading. This attitude is linked to confidence. Because exceptional traders are confident that they will win over the long run, individual trades no longer seem horrible; they simply appear inevitable.
There is no more certain recipe for losing than having a fear of losing. If you cant stand taking losses, you will either end up taking large losses or missing great trading opportunities – either flaw is sufficient to sink any chance for success. - Lack of Confidence and Time-Outs
Trade only when you feel confident and optimistic. - The Urge to Seek Advice
The urge to seek advice betrays a lack of confidence. - The Virtue of Patience
Waiting for the right opportunity increases the probability of success. You don’t always have to be in the market.
Guard particularly against being overeager to trade in order to win back prior losses. Vengeance trading is a sure recipe for failure. - The Importance of Sitting
Patience is important not only in waiting for right trades, but also in staying with trades that are working. The failure to adequately profit from correct trades is a key profit-limiting factor.
“One common adage .. that is completely wrong headed is : You cant go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits.” - Developing a Low-Risk Idea
The merit of a low risk idea is that it combines two essential elements: patience (because only a small portion of ideas will qualify) and risk control (inherent in the definition). “Open a doughnut shop next door to a police station”. - The Importance of Varying Bet Size It can be mathematically demonstrated that in any wager game with varying probabilities, winnings are maximized by adjusting the bet size in accordance with the perceived chance of a successful outcome.
- Scaling In and Out of Trades
You don’t have to get in or out of a position all at once. Scaling in and out of positions provides the flexibility of fine tuning trades and broadens the set of alternative choices. - Being Right is More Important than being a Genius
Think about winning rather than being a hero. Go for consistency on a trade-to-trade basis, not perfect trades. - Don’t Worry About Looking Stupid
Don’t talk about your position. - Sometimes Action is More Important than Prudence
When your analysis, methodology, or gut tells you to get into a trade at the market instead of waiting for a correction – do so. - Catching Part of the Move is Just Fine
Just because you missed the first major portion of a new trend, don’t let that keep you from trading with that trend (as long as you can define a reasonable stop-loss point). - Maximize Gains, Not the Number of Wins The success rate of trades is the least important performance statitstic and may even be inversely related to performance.
- Learn to be Disloyal
Never have loyalty to a position. - Pull Out Partial Profits
Reward Yourself ! - Hope is a Four-Letter Word
Hope is a dirty word for a trader, not only in regards to procrastinating in a losing position, hoping the market will come back, but also in terms of hoping for a reaction that will allow for a better entry in a missed trade. - Don’t Do the Comfortable Thing
Do what is right, not what feels comfortable. - You Cant Win If You Have To Win
“Scared money never wins”. If you are risking money you cant afford to lose, all the emotional pitfalls of trading will be magnified. The market seldom tolerates the carelessness associated with traders born of desperation. - Think Twice When The Market Lets You Off The Hook Easily
There must be some very powerful underlying forces in favor of the direction of the original position ! - A Mind is a Terrible Thing to Close
Open-mindedness seems to be a common trait among those who excel at trading. - The Markets are an Expensive Place to Look for Excitement
Excitement has a lot to do with the image of trading but nothing to do with success in trading. - The Calm State of a Trader
If there is an emotional state associated with successful trading, it is the antithesis of excitement. Exceptional traders are able to remain calm and detached regardless of what the markets are doing. - Identify and Eliminate Stress
Stress in trading is a sign that something is wrong. If you feel stress, think about the cause, and then act to eliminate the problem. - Pay Attention to Intuition
Intuition is simply experience that resides in the subconscious mind. The objectivity of market analysis done by the conscious mind can be compromised by all sorts of extraneous considerations (e.g., one’s current market position, a resistance to change a previous forecast). The subconscious, however, is not inhibited by such constraints. Unfortunately, we cant readily tap into our subconscious thoughts. However, when they come through as intuition, the trader needs to pay attention. “The trick is to differentiate between what you want to happen and what you know will happen. - Life’s Mission and Love of the Endeavor
Many traders felt that trading was what they were meant to do – in essence, their mission in life. - The Elements of Achievements
Faulkner’s list of the six key steps to achievement- using both “Toward” and “Away From” motivation;
- having a goal of full capability plus, with anything less being unacceptable;
- breaking down potentially overwhelming goals into chunks, with satisfaction garnered from completion of each individual steps;
- keeping full concentration on the present moment – that is, the single task at hand rather than the long-term goals;
- being personally involved in achieving goals (as opposed to depending on others); and
- making self-to-self comparisons to measure progress.
Robert Krausz’s basic tasks necessary to become a winning trader.
- Develop a competent analytical methodology.
- Extract a reasonable trading plan from this methodology.
- Formulate rules for this plan that incorporate money management techniques.
- Back-test the plan over a sufficiently long period.
- Exercise self-management so that you adhere to the plan. The best plan in the world cannot work if you don’t act on it.
- Prices are Nonrandom = The Markets can be Beat
In reference to academicians who believe market prices are random, Trout says, “That’s probably why they’re professors and why I’m making money doing what I’m doing.” These exceptional traders have proved that it can be done ! - Keep Trading in Perspective
There is more to life than trading !